Audit test two MC

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In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an
explanatory paragraph?
a. The auditor wishes to emphasize that the entity had significant related party transactions.
b. The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's
c. The entity issues financial statements that present financial position and results of operations, but omits
the statement of cash flows .
d. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the
circumstances are fully disclosed in the financial statements.


no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. F.S. have no material misstatements an auditor concurs with change. change is disclosed in the notes to the F.S.

opinion is...

unqualified opinion

An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph
A. Is appropriate and would not negate the unmodified opinion.
B. Is considered an "except for" qualification of the opinion.
C. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements.
D. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation."


Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle's inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either
A. A qualified opinion or a disclaimer of opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph.
D. A qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph.


In which of the following circumstances would an auditor usually choose between issuing a qualified opinion or an adverse opinion on a client's financial statements?
A. Departure from generally accepted accounting principles.
B. Inadequate disclosure of accounting policies.
C. Inability to obtain sufficient competent evidence.
D. Unreasonable justification for a change in accounting principle.


Unmodified opinion


review page 637


Three important determinants of sample size

confidence level
tolerable misstatement
estimated misstatement

type 1 error

incorrect rejection
auditor says something is not working when it is

type 2 error

incorrect acceptance
auditor says something is working when it is not

efficiency (error type)

type 1

effectiveness (error type)

type 2

Audit risk

the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated.

desired confidence level

auditor sets
an important factor to determining sample size
the probability that the true but unknown measure of the characteristic of interest is within specified limits
higher sample=higher confidence level

allowance for sampling risk

tolerable deviation rate-expected

Confidence Intervals

Suppose an auditor used sample results to project a misstatement (i.e., a point estimate of error) of $50,000 in the population. The auditor calculates a 90% confidence interval of +/- $10,000. This means the auditor can be 90% confident that the interval of $40,000 to $60,000 contains the true value of the error in the population.

Four nonstastistical requirements

1. any application of nonstastical sampling result in a comparable sample size to statistical sampling
2. Selection methods used should be expected to result in a representative sample
3. Errors observed be projected
4. Auditor consider sampling risk

haphazard selection

items are chosen without regard to their size, source, or other distinguishing characteristics.
auditors best effort to be random without using tools

systematic selection

randomly select one number and then every tenth after that

classical sampling

is used more frequently to determine whether an account is materially misstated.
Used for substantive tests.

Monetary-unit Sampling

used to estimate the dollar amount of misstatement for a class of transactions or an account balance. Used for substantive tests.

Attribute Sampling

used to estimate the proportion of a population that possesses a specified characteristic, e.g. the presence of a control.
Used to test controls.

Stratified Sampling

1.Items in the population are divided into two or more subpopulations.
2.Used to emphasize certain population items (e.g. large dollar amounts).


1. the auditor should project the sample results
to the population.
2. the auditor should add an amount for
sampling risk.
Note: sampling risk can be judgmentally determined but to be mathematically determined a random sample must be selected.
3.the total amount should be *compared with
tolerable misstatement*.

MIRAD COPS, which commonly use audit sampling?

Math Recalculation - Yes

Inquiry - No

Reperformance - Yes

Analytical Procedures - No

Documents, Inspection of - Yes

Confirmation - Yes

Observation - No

Physical Assets, Inspection of - Yes

Scanning - No

Employees who maintain the AR subsidiary ledger should not also approve

write-offs of customer accounts

what control is most likely to help ensure that all credit revenue transactions of an entity are recorded?

matching prenumbered shipping documents with entries in the Sales Journal.

what would deter the lapping of collections from customers?

segregation of duties between receiving cash and posting the accounts receivable ledger

cash receipts from sales on account have been misappropriated what act would conceal this defalcation and be least likely to be detect by an auditor

understanding the S.J.

thee transactions associated with revenue process

Sale of goods
receipt of cash
return of goods

open-order report

a report of all customer orders for which processing has bot been completed
-out of stock
-back order

shipping document

-prepared any time goods are shipped to a customer
-bill of lading
-quantity, type
one copy to customer
one copy to billing

Sales Invoice

-used to bill the customer
-type of product or service
-terms of trade
original to customer
*usually signals the recognition of revenue

Sale Journal

used to record the necessary information for each sales transaction

customer statement

mailed to customer monthly

remittance advice

mailed with customer's bill and returned with the customer's payment

credit memorandum

records credits for the return of goods

write-off authorization

initiated in credit department with final approval for write-of from treasurer


order entry
credit authorization
cash receipts
Accounts Receivable
General Ledger

credit function should be separated from

billing function
(possible for sales to be made to customers who are not creditworthy)

shipping separated from

(possible for unauthorized shipments to be made and for the usual billing procedures to be circumvented. unrecorded sale transactions and theft of goods)

AR separated from

general lever function
(individual can conceal unauthorized shipments. unrecorded sale transactions and theft of goods

cash receipts separated from

AR function
(cash can be diverted and the shortage of cash in the AR covered)

if the results of the test of controls don't support the planned level of control risk then the auditor sets control risk at a

higher level than planned

substantive analytical procedures test

revenue related accounts

what kind of tests are the best?

confirmation tests

what assertions do customer confirmations test?


what assertions do bank confirmations test?

Rights and Obligations

What assertions do lawyer confirmations test?


how do you test for sales recorded before shipment?

trace from SJ to shipping docs

confirmations are required by auditing standards unless

1-AR balance is immaterial
2-confirmations wouldn't be affective
3-IR and CR are low

3 timing differences where there is not adjustment necessary

goods shipped
payment to customer passed (paid 12/29 received 1/2)
goods returned




verifying that recorded AP include all accounts owed to vendors


verify that all accounts payable are recorded in the correct period


determine whether accounts payable have been properly accumulated from the journal to the general ledger


determine whether recorded ap are valid

compare selected amounts from the AP listing with the voucher and supporting documetns


search for unrecorded liabilties


select a sample of receiving docs for a few days before and after year end


obtain a listing of the AP and agree total to general ledger control account


product costs

expenses that can be matched directly with specific transactions. recognized upon recognition of revenue

period costs

recognized during the period in which cash is spent or liabilities incurred for goods/ servicesthat are used up at that time
-rent expense
-no future benefit

purchase requisition

requests godos or services for an authorized individual or department within the entity

Purchase order

description, quality, and quantity of goods
-who approved the acquisition
-authorization to buy goods

vendor invoice

bill from vendor


basis for recording a vendor's invoice in the PJ
-contains all relevant documentation supporting a purchase transaction

voucher register/ PJ

used to record the vouchers for goods or services
a vendor # can be assigned to each voucher and the voucher register can be sorted by vendor to produce a sub ledger for AP

vendor statemetn

sent monthly by vendor

major functions of Purchasing process

-invoice processing
-General Ledger

purchasing separate from

requisitioning and receiving
(fictions or unauthorized purchases can be made)

invoice-processing separate from

(purchase transactions can be processed at the wrong price or terms, or cash disbursement can be processed for goods or services not received)

disbursement function separate from

unauthorized checks supported by fictious documentation can be issued
unauthorized transactions recorded

AP separate from

general ledger
(concealed defalcation)

blank or zero confirmation

doesn't state balance owed

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